Locking crypto into lending platforms that offer interest rates orders of magnitude above traditional bank savings accounts can be lucrative. But are its days numbered?
The Securities and Exchange Commission has fired another shot across the bow of high-yield cryptocurrency lending.
BlockFi is being investigated by the SEC over its BlockFi Interest Accounts (BIAs), which offer clients annual yields of as much as 9.5% for parking their cryptocurrency into lending programs.
The problem, as the SEC sees it, is that these BIAs may be securities, Bloomberg reported on November 17. If so, BlockFi is illegally offering unregistered securities. The company is also facing scrutiny from a number of state regulators, including Texas, Alabama, Kentucky, and was issued a cease-and-desist order in its home state, New Jersey.
BlockFi clients can borrow for as little as 4.5%. But they are not FDIC insured like traditional bank savings accounts, which run under 0.5% APY at best, according to Bankrate. Many offer far less, with Bloomberg citing the average as 0.06% APY.
Under new SEC Chairman Gary Gensler, the agency has been more aggressive in pursuing these financial products
The SEC recently fired a shot across the bow of crypto lending, threatening to sue Coinbase if the public company went ahead with plans to offer a lending product called Coinbase Earn, offering a 4% APY. After a month of bluster, Coinbase dropped the planned offering. Competitors Gemini offered up to 8.05% APY on its Gemini Earn product at press time, and Celsius offered up to 17% APY.
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Lucrative But Risky
Crypto lending is lucrative, but can be risky, particularly for borrowers, who typically put up cryptocurrency worth at least 150% the amount they want to borrow, which is typically taken in stablecoins or dollars. This collateral will be sold if its price falls too close to the value of the loan — a process known as a margin call.
BlockFi offers U.S. borrowers 9.75% interest rates on loans in which collateral worth 200% of the amount borrowed is put up — a 50% loan-to-value (LTV) ratio. At 300% collateral — 35% LTV — borrowers get a 7.9% rate. At 500% — 20% LTV — borrowers can access a 4.5% interest rate.
Decentralized finance platforms offer rates that vary widely. In August, Aave offered up to 15% APY, while Compound offered no more than 3%.
